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The Daily Magic Formula Stock for 01/19/2008 is Forest Laboratories Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is >100 %.

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BUSINESS OVERVIEW

General

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products which require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. Our most important United States products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by our Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales salesforces. We emphasize detailing to physicians of those branded ethical drugs which we believe have the most potential for growth and benefit to patients, and the development and introduction of new products, including products developed in collaboration with licensing partners.

Our products include those developed by us and those acquired from other pharmaceutical companies and integrated into our marketing and distribution systems.

We are a Delaware corporation organized in 1956, and our principal executive offices are located at 909 Third Avenue, New York, New York 10022 (telephone number 212-421-7850). Our corporate website address is http://www.frx.com. We make all electronic filings with the Securities and Exchange Commission (or SEC), including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those Reports available on our corporate website free of charge as soon as practicable after filing with or furnishing to the SEC.

Recent Developments

Cerexa, Inc.: Effective January 10, 2007, we acquired Cerexa, Inc. (or Cerexa), a biopharmaceutical company based in Alameda, California, in a cash merger pursuant to which Cerexa became a wholly-owned subsidiary of the Company.

Pursuant to the merger, we acquired worldwide development and marketing rights (excluding Japan) to ceftaroline acetate (or ceftaroline), a next generation, broad spectrum, hospital-based injectable cephalosporin antibiotic that exhibits bactericidal activity against the most resistant strains of gram-positive bacteria, including MRSA (methicillin resistant Staphylococcus aureus) as demonstrated by a completed Phase II comparative trial in patients with complicated skin and skin structure infections (or cSSSI). Ceftaroline has also demonstrated bactericidal activity against penicillin resistant Streptococcus pneumonia and common gram-negative bacteria. Ceftaroline is being developed initially for the cSSSI indication and the treatment of community acquired pneumonia. Phase III studies of ceftaroline for cSSSI began in February 2007. If the Phase III program is successful, we anticipate submitting an NDA sometime in calendar 2009.

The acquisition of Cerexa also included a second development stage hospital-based antibiotic, ME1036, which has shown activity against both aerobic and anaerobic gram-positive and gram-negative bacteria, including common drug-resistant pathogens, such as MRSA, in preclinical studies. ME1036 is expected to enter Phase I studies later this year.

The rights to ceftaroline and ME1036 are in-licensed by Cerexa on an exclusive basis from Takeda Pharmaceutical Company and Meiji Seika Kaisha, Ltd., respectively.

We paid cash consideration of approximately $494 million in connection with the merger and certain related expenses. We will be obligated to pay an additional $100 million in the event that annual United States sales of ceftaroline exceed $500 million during the five year period following product launch. The merger consideration paid at closing has been expensed in fiscal 2007 as purchased in-process research and development.

Aclidinium (LAS 34273) : In April 2006, we entered into a collaboration and license agreement with Almirall Prodesfarma S.A. (or Almirall), a pharmaceutical company headquartered in Barcelona, Spain, for the development and exclusive United States marketing rights to aclidinium, Almirallâ€™s novel long-acting muscarinic antagonist. Aclidinium is being developed as an inhaled therapy for chronic obstructive pulmonary disease (or COPD). Aclidinium has been evaluated in Phase II studies that demonstrate that it has a fast onset of action and provides 24 hours of bronchodilation when administered once-daily. An international Phase III program is currently being conducted by us and Almirall. Enrollment is expected to be completed by the end of June 2007. Aclidinium is designed to have specific action in the lungs and is believed to be rapidly metabolized in the lungs with limited systemic exposure. Studies to date support a favorable side effects profile. The product is being developed in a Multi-Dose Dry Powder Inhaler (or MDPI) which we believe represents an improvement in drug delivery over currently available devices.

COPD is a debilitating respiratory condition that includes two related lung diseases: chronic bronchitis and emphysema. It affects approximately 24 million Americans, a population even larger than the 20 million who suffer from asthma. However, COPD frequently goes undiagnosed and untreated because it is difficult to identify in its early stages. The primary cause of COPD is prolonged cigarette smoking. It is the fourth leading cause of death in the United States after heart disease, cancer and stroke. According to the National Heart, Lung and Blood Institute, COPDâ€™s prevalence and associated death rate are rising. In 2020, COPD is projected to become the third leading cause of death in the United States. Today, the economic burden of COPD on the U.S. healthcare system is substantial, estimated at over $30 billion annually.

Under the terms of the agreement, we made an upfront payment of $60 million to Almirall, a development milestone payment in May 2007 and may be obligated to pay future milestone payments. In addition, Almirall will receive royalty payments based on aclidinium sales. Forest and Almirall will jointly oversee the development and regulatory approval of aclidinium and share all expenses for current and future development programs. Almirall has granted us certain rights of first negotiation for other Almirall respiratory products that could be combined with aclidinium.

We will be responsible for sales and marketing of aclidinium in the U.S. and Almirall has retained an option to co-promote the product in the U.S. in the future while retaining commercialization rights for the rest of the world . In addition to five years of Hatch-Waxman exclusivity granted upon approval, aclidinium is protected by an issued US composition of matter patent expiring in September 2020. We expect a patent term extension under the Drug Price Competition and Patent Term Restoration Act.

Nebivolol : In January 2006, we entered into a license and collaboration agreement with Mylan Laboratories, Inc. (or Mylan) for the development and commercialization of Mylanâ€™s beta blocker nebivolol in the United States and Canada.

Nebivolol is a novel beta blocker that is already approved and marketed in more than 65 countries outside of North America. Nebivolol is a selective beta-1 blocker with vasodilating properties which may provide certain advantages compared to currently marketed beta blockers. Upon FDA approval, Nebivolol will receive five years of marketing exclusivity under the Hatch-Waxman legislation. In addition, there is an issued U.S. pharmaceutical composition of matter patent set to expire in 2020 which may offer additional exclusivity.

Under the terms of the agreement, we made an upfront payment to Mylan of $75 million and we may be required to make potential future milestone payments. In addition, Mylan will also receive royalty payments based on nebivolol sales. We will assume all nebivolol development expenses for current and future development programs and will be responsible for all sales and marketing expenses. Mylan has retained an option to provide certain co-promotion activities in the U.S. with respect to the product in the future.

In May 2005, Mylan received an "approvable" letter from the FDA for nebivolol for the treatment of hypertension. Final approval is contingent upon the FDAâ€™s review of certain pre-clinical data. We and Mylan expect the FDA to complete its review of the additional data by the end of calendar 2007.

RGH-896; mGLUR1/5 Compounds : In November 2005, we entered into two new collaboration agreements with Gedeon Richter Ltd. (or Richter), based in Budapest, Hungary, with whom we are currently developing Gedeon Richterâ€™s RGH-188 (see discussion below) for the treatment of schizophrenia and bipolar mania.

The first collaboration will focus upon a group of compounds that target the NR2B receptor and will be developed for the treatment of chronic pain and other central nervous system (or CNS) conditions. RGH-896 is the first of this group and is currently in early clinical development. We paid Richter an upfront payment and will become obligated to pay milestone payments based upon achievement of development objectives. The two companies will jointly fund the development program. Forest has exclusive marketing rights in the United States and Canada and will pay Richter a royalty on net sales. RGH-896 has patent applications that, if allowed, will provide us patent protection until at least 2022.

The second new collaboration will focus upon a group of novel compounds that target metabotropic glutamate receptors (mGLUR1/5). mGLUR1/5 antagonists represent novel potential agents for the treatment of anxiety, depression and other CNS conditions. Richter and Forest intend to advance promising leads to clinical trials within the next two to three years. We paid Richter an upfront payment and will pay milestone payments based upon the achievement of development objectives in addition to royalties. We will have exclusive marketing rights in North America while Richter will retain exclusive rights in Europe and countries comprising the former Soviet Union. The two companies will share rights in other countries.

LexaproÂ® : In September 2002, we launched Lexapro (escitalopram oxalate), a single isomer version of CelexaÂ® (citalopram HBr) for the treatment of major depression, following approval of the product by the FDA in August 2002. Citalopram is a racemic mixture with two mirror image molecules, the S- and R-isomers. The S-isomer of citalopram is the active isomer in terms of its contribution to citalopram's antidepressant effects, while the R-isomer does not contribute to the antidepressant activity. With Lexapro, the R-isomer has been removed, leaving only the active S-isomer. Clinical trials demonstrate that Lexapro is a more potent selective serotonin reuptake inhibitor (or SSRI) than its parent compound, and confirm the antidepressant activity of Lexapro in all major clinical measures of depression. During fiscal 2007, sales of Lexapro were $2,105,990,000. According to data published by IMS, an independent prescription audit firm, as of April 30, 2007, Lexapro achieved an 18.5% share of total prescriptions for antidepressants in the SSRI/SNRI category.

In December 2003, Lexapro received FDA approval for the treatment of generalized anxiety disorder (or GAD), a disorder characterized by excessive anxiety and worry about every day events or activities for a period of 6 months or more. The approval was based upon three GAD studies involving Lexapro which demonstrated significantly greater improvement in anxiety symptoms relative to placebo. Forest began marketing Lexapro for the treatment of GAD in January 2004.

Lexapro was developed by us and H. Lundbeck A/S (or Lundbeck), a Danish pharmaceutical firm which licenses to us the exclusive United States marketing rights to this compound, as well as Celexa.

Lexapro is covered by a composition of matter patent which expires March 14, 2012, inclusive of additional exclusivity granted as a result of a pediatric study which we performed and to an 828 day patent term extension granted by the U.S. Patent and Trademark Office in March 2006. In July 2006, the U.S. District Court for the District of Delaware determined that our composition of matter patent is both valid and enforceable against a generic product proposed to be sold by Teva Pharmaceuticals. Information concerning this case and other patent infringement litigation brought by us and Lundbeck in connection with filings seeking regulatory approval for generic versions of Lexapro is set forth below at Item 3. Legal Proceedings . We intend to fully enforce our patent rights.

NamendaÂ®: In October 2003, Namenda (memantine HC1) was approved for marketing and distribution by the FDA for the treatment of moderate to severe Alzheimer's disease. Initial stocking of Namenda occurred in December 2003 and our salesforce began product promotion in March 2004. Namenda is a moderate-affinity, uncompetitive NMDA receptor antagonist that modulates the effects of glutamate - a neurotransmitter found in the brain. Excessive levels of glutamate are hypothesized to contribute to the dysfunction and eventual death of brain cells observed in Alzheimer's disease. We believe that Namenda's mechanism of action is distinct from other drugs currently available to treat Alzheimer's disease. We obtained the exclusive rights to develop and market memantine in the United States by license agreement with Merz Pharma GmbH of Germany (or Merz), the originator of the product.

Namenda achieved sales of $660,295,000 during our 2007 fiscal year and, according to data published by IMS, an independent prescription audit firm, as of April 30, 2007, Namenda achieved a 33.0% share of total prescriptions in the Alzheimerâ€™s market. During fiscal 2005, the FDA accepted for review our sNDA to expand the indication of Namenda to include treatment of mild Alzheimer's disease. In July 2005, we received a "non-approvable" letter from the FDA with respect to the mild Alzheimerâ€™s disease indication . In May 2006 , the FDA reaffirmed the non - approvable status of Namenda in mild patients. Namenda is covered by a U.S. patent which expires in 2010 and should be subject to a patent term extension until September 2013.

In addition, during the 2007 fiscal year we initiated a Phase III Alzheimerâ€™s disease study of Namenda in a modified-release, once-daily formulation and expect results to be available in early calendar 2008.

Finally, during fiscal 2006 we completed a Phase II "proof of concept" study of neramexane, a second NMDA receptor antagonist which we licensed from Merz. The results indicated clinical activity in moderate to severe Alzheimerâ€™s disease, as well as safety and tolerability, sufficient to continue development of the compound. We plan to commence an additional Phase II proof of concept study of neramexane in Alzheimerâ€™s patients later this year which will provide further information to guide development decisions with respect to this compound.

BenicarÂ® Co-Promotion with Daiichi Sankyo : In December 2001, we entered into a co-promotion agreement with Daiichi Sankyo (or Sankyo) for the co-promotion in the United States of Benicar (olmesartan medoxomil) an angiotensin receptor blocker (or ARB) discovered and developed by Sankyo for the treatment of hypertension. The NDA for Benicar was approved by the FDA in April 2002 and the product was commercially launched by the Sankyo and Forest salesforces in the United States in May 2002. In August 2003, the FDA approved Benicar HCTÂ®, a combination of Benicar and hydrochlorothiazide, which is also jointly promoted by Forest and Sankyo.

Pursuant to the co-promotion agreement with Sankyo, we share with Sankyo in the detailing of the product to physicians, hospitals, managed care organizations and other institutional users of pharmaceutical products over a six-year period. We receive co-promotion income based upon the relative contribution of the two companies to the co-promotion effort through fiscal year ending March 31, 2008, and will receive residual payments on a reduced basis following the end of the co-promotion period based on sales levels achieved through the fiscal year ending March 31, 2014. During fiscal 2007, we received co-promotion income of $174,566,000. According to market share data published by IMS, an independent prescription audit firm, as of April 30, 2007, Benicar and Benicar HCT achieved a combined 16.0% share of total prescriptions in the ARB market.

CampralÂ®: In January 2005, we launched Campral (acamprosate calcium), approved by the FDA in July 2004, for the maintenance of abstinence from alcohol in patients with alcohol dependence who are abstinent at treatment initiation. Sales of Campral were $29,649,000 in fiscal 2007.

The mechanism of action of Campral in maintenance of alcohol abstinence is not completely understood. Chronic alcohol exposure is hypothesized to alter the normal balance between neuronal excitation and inhibition. Campral interacts with neurotransmitter systems and is hypothesized to restore the normal balance. This mechanism of action is different from that ascribed to other currently available medications, which either block the "high" associated with alcohol consumption or induce vomiting if alcohol is ingested. Treatment with Campral should be part of a comprehensive management program that includes psychosocial support.

Campral was developed by Merck Sante s.a.s., a subsidiary of Merck KGaA of Darmstadt, Germany, and licensed to us for exclusive marketing and distribution in the United States. Our license requires us to purchase our requirements of Campral's active pharmaceutical ingredient from Merck Sante. Campralâ€™s five years of exclusivity under the Hatch-Waxman Act will expire in fiscal 2010.

RGH-188: In November 2004, we entered into a collaboration and license agreement with Gedeon Richter Ltd. for the development of and exclusive United States licensing rights to Gedeon Richter's RGH-188 and related compounds, being developed as an atypical antipsychotic for the treatment of schizophrenia, bipolar mania and other psychiatric conditions.

One Phase II study of RGH-188 commenced during the 2007 fiscal year evaluating RGH-188 in schizophrenia patients and one Phase II trial in bipolar mania patients commenced in April 2007. If these Phase II studies are successfully completed, it is possible that the compound will begin Phase III clinical testing in the United States in the middle of calendar 2008. The pre-clinical studies suggest that the product will be active and well tolerated in future clinical testing and may have a lower potential to cause some of the adverse events that are associated with certain members of this therapeutic class. RGH-188 is currently claimed by a U.S. patent application which, if issued, will expire in 2024.

Upon execution of the collaboration agreement, we paid Gedeon Richter an upfront license fee and we will be obligated to pay further milestone payments if development and commercialization are successfully completed. We are also obligated to pay Gedeon Richter a royalty based on net sales and to purchase our requirements of the active pharmaceutical ingredient from them. Our license grants us exclusive development and commercialization rights in the United States and Canada. We will collaborate with Gedeon Richter in product development and will jointly fund such development activities.

GRC 3886: In September 2004, we entered into a collaboration and license agreement with Glenmark Pharmaceuticals, of Mumbai, India, covering Glenmark's PDE4 inhibitor referred to as GRC 3886. GRC 3886 is a novel, orally available phosphodiesterase-IV (or PDE4) inhibitor in development for COPD and asthma, and may also have use in other conditions.

Bronchodilators and anticholinergics are the most commonly prescribed therapies in COPD, but do not address the underlying inflammation. PDE4 inhibitors represent a new class of drugs that are interesting because they have the potential to relax the smooth muscles of the airway resulting in bronchodilation, as well as inhibit inflammatory cell activity, thus providing both short-term relief and control over the progression of the disease.

In pre-clinical studies, the compound appeared to be active in a number of experimental models. In March 2005, in a successfully completed Phase I single and multiple dose study in the U.K., GRC 3886 was well tolerated over the entire dose range given. While we have performed limited additional clinical trials, the initiation of large scale Phase II studies has been delayed pending the provision of certain additional preclinical data to the FDA. GRC 3886 is currently claimed by U.S. patent applications which, if issued, will expire in 2024.

We will develop, register and commercialize GRC 3886 for the North American market, while Glenmark will retain commercialization rights for the rest of the world. We paid Glenmark an upfront payment upon initiation of the agreement and an additional milestone payment upon the successful completion of the antigen challenge study in asthma patients. We will be required to pay future milestones if the development and commercialization of the product is successfully completed in the North American market. Additionally, after commercial launch, Glenmark will earn a royalty from us on net sales of the product, and will supply all active pharmaceutical ingredient required by us.

Desmoteplase: In June 2004, we entered into a license agreement with PAION GmbH (or PAION), Germany, for the development and exclusive marketing in the United States and Canada for desmoteplase, a novel plasminogen activator, or blood clot-dissolving agent, for the treatment of acute ischemic stroke and potentially, other indications.

Stroke is the third leading cause of death in the United States and Europe, behind heart disease and cancer. According to the American Heart Association, over 600,000 people in the U.S. fall victim to an ischemic stroke annually which comprises approximately 88 percent of all strokes. The treatment of acute stroke and its serious long-term disabilities currently present an extensive unmet need.

Ischemic stroke occurs when a blood vessel, supplying the brain with oxygen and nutrients, is obstructed by a blood clot. The blockage or rupture of the vessel results in a lack of blood flow to part of the brain. Deprived of oxygen, nerve cells in the affected region die within minutes or hours after the event resulting in loss of function of the part of the body they control. Ischemic stroke requires emergency treatment to rapidly dissolve or remove the blood clots in the brain, but many people delay getting treatment.

Desmoteplase, first in a new class of plasminogen activators, is a genetically engineered version of a clot-dissolving protein found in the saliva of the vampire bat Desmodus rotundus. It possesses high fibrin selectivity, allowing it to dissolve a clot locally while minimally affecting the blood coagulation system, which is thought to potentially reduce the risk of intracranial bleeding (a common risk when administering blood clot-dissolvers) as compared to less fibrin-specific plasminogen activators. The only currently available clot-dissolving agent must be administered within three hours of symptom onset; however, the majority of stroke patients arrive at the hospital outside that treatment window. Desmoteplase, with a longer window, could expand the number of patients who receive clot-dissolving therapy.

PAION presented positive results from a Phase II study (DIAS - Desmoteplase in Acute Ischemic Stroke) at the 29 th International Stroke Conference in February 2004. The DIAS study was a multi-center, double-blind, placebo-controlled, randomized, dose-finding Phase II study conducted in 102 patients across 25 hospitals in Europe, Australia and Asia. Patients were selected using magnetic resonance imaging and administered desmoteplase in the time window between three and nine hours after the onset of stroke symptoms. The study demonstrated that by administering desmoteplase, the blood flow in the damaged area of the brain was significantly improved and expansion of the damaged area of brain tissue was better prevented, which led to preliminary evidence of improved clinical outcome after 90 days in up to 60 percent of patients who received the optimal dose. Additionally, only 3.3 percent of 30 patients who received the two doses selected for further clinical testing experienced a symptomatic intracranial bleed. Results from a second U.S. focused study with the same design, DEDAS, were presented in February 2005. The DEDAS study was a multi-center, placebo-controlled, double-blind, randomized dose-escalating Phase II trial conducted in 38 patients across 17 hospitals in the United States and three in Europe. The study demonstrated similar results to the earlier DIAS trial, showing trends indicating that desmoteplase administered intravenously in the time window of up to nine hours after the onset of stroke symptoms improved blood flow in the damaged area of the brain and improved clinical outcome after 90 days compared to placebo.

Based on the encouraging results of the DIAS and DEDAS Phase II trials and discussions with the FDA with respect to study design, in February 2005 we initiated a Phase II(b)/III study of desmoteplase. The DIAS2 (Desmoteplase in Acute Ischemic Stroke) study is a multi-center, multinational, randomized, parallel-design dose-ranging study of more than 180 patients to confirm results of the earlier Phase II studies. Enrollment in DIAS2 was completed at the end of calendar 2006 and it is anticipated that results will be available in early June 2007. Desmoteplase has been granted fast track status by the FDA, a designation granted for drugs that address an unmet medical need in life-threatening indications. Fast track designation allows for the expedited review of a Biological Licensing Application (or BLA) by the FDA, generally within six months of the filing date.

We and PAION entered into our license agreement on June 30, 2004 at which time we made an upfront payment to PAION. Under the agreement, PAION will receive milestone payments and a royalty based on sales, and we will fund all continuing clinical development activities for the U.S. and Canadian markets. We will be responsible for regulatory and sales and marketing activities in the United States and Canada and will have the development and marketing rights to other indications of the product in these territories. PAION retains commercial rights in Europe, Japan and the rest of the world. Desmoteplase is covered by several issued composition of matter patents, including some that do not expire in the United States until 2015, with the potential for extensions.

Milnacipran: In January 2004, we entered into a license and collaboration agreement with Cypress Bioscience, Inc. (or Cypress) for the development and marketing in the United States of milnacipran. Milnacipran is currently in Phase III development as a treatment for fibromyalgia syndrome (or FMS). FMS is a frequent cause of chronic, widespread pain and is estimated to affect six to twelve million people in the United States. There are currently no products approved by the FDA for the treatment of this disorder. Pursuant to the collaboration agreement, we paid Cypress an upfront license fee and will pay Cypress milestone payments on the achievement of specific product development milestones, as well as running royalties based on net sales of the product following approval. We will be responsible for funding further development activities, which will be jointly managed by the two companies, and will have responsibility for sales and marketing activities, with Cypress having the option to perform up to 25% of physician details on a fee-for-service basis. The license agreement includes two patents covering the use of milnacipran for the treatment of FMS. In addition, we believe that, as a new chemical entity not previously approved by the FDA, milnacipran will qualify for five years of exclusivity under the Hatch-Waxman Act.

The current Phase III program is based on the results of a controlled, randomized Phase II Study in 125 FMS patients and consists of three Phase III trials being conducted in the United States. The Phase II Study demonstrated statistically significant improvements in multiple measures of clinical pain and secondary symptoms, including fatigue, mood and patient global status reports.

On May 22, 2007, we and Cypress reported that top-line results of a Phase III study demonstrated statistically significant therapeutic effects of milnacipran as a treatment of FMS. Subject to a favorable review of the full study results and based in part on communication with the FDA, we plan to submit an NDA including data from this study, together with results from an earlier Phase III study which did not achieve statistical significance but which indicated a durable response to milnacipran treatment. Results from a third Phase III study are expected in the middle of calendar 2008.

Termination of Faropenem License: In February 2007, we terminated our license agreement with Replidyne, Inc. for the development of faropenem medoxomil, a development stage community antibiotic. Our decision to terminate this development program was due to regulatory uncertainty following receipt of a "non-approvable" letter from the FDA.

Share Repurchase Program: On May 18, 2006 our Board of Directors authorized a new share repurchase program for up to an additional 25 million shares of our common stock. The authorization became effective immediately and has no set expiration date. We expect to make the repurchases from time to time on the open market, depending on market conditions. As of May 25, 2007, 10,315,300 shares have been repurchased and we continue to have authority to purchase up to an additional 14,684,700 shares under this new program.

Lawrence S. Olanoff, MD, Ph.D.: Effective October 30, 2006, Lawrence S. Olanoff, MD, Ph.D. was appointed our President and Chief Operating Officer and a Director of the Company. Dr. Olanoff succeeded Kenneth E. Goodman, who announced his retirement after 26 years with the Company, but who remains a member of our Board of Directors. Dr. Olanoff, 55, served as our Executive Vice President and Chief Scientific Officer for the ten years ended July 2005 and previously held senior executive positions with Celsion Corporation, Sandoz Pharmaceuticals and The UpJohn Company.

Forward Looking Statements : Except for the historical information contained herein, this report contains forward looking statements that involve a number of risks and uncertainties, including the difficulty of predicting FDA approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the impact of legislative and regulatory developments on the manufacture and marketing of pharmaceutical products and the uncertainty and timing of the development and launch of new pharmaceutical products.

Principal Products

We actively promote in the United States those branded products which we believe have the most potential for growth and patient benefit, and which enable our salesforces to concentrate on groups of physicians who are high prescribers of our products. Such products include: Lexapro, our SSRI for the treatment of major depression and GAD; Namenda, our NMDA antagonist for the treatment of moderate to severe Alzheimer's disease; Benicar, an angiotensin receptor blocker for the treatment of hypertension and Benicar HCT, an angiotensin receptor blocker and diuretic combination product, both of which we co-promote with Sankyo; and Campral, for the maintenance of alcohol abstinence.

Sales of Lexapro, launched in September 2002, accounted for 66.2% of our sales for the fiscal year ended March 31, 2007 and 67% and 52.6% of our sales for our fiscal years ended 2006 and 2005, respectively.

Sales of Celexa, launched in September 1998, accounted for 0.8% of our sales for the fiscal year ended March 31, 2007 and 0.7% and 21.6%, respectively, of our sales for our 2006 and 2005 fiscal years.

Sales of Namenda, launched in December 2003, accounted for 20.7% of our sales for the fiscal year ended March 31, 2007 and 18.2% and 10.9%, respectively, of our sales for fiscal 2006 and 2005.

Our generic line, marketed by our Inwood Laboratories, Inc. subsidiary, includes generic equivalents to certain of our branded products, including Celexa and Tiazac, as well as products using our controlled release technology.

Our United Kingdom and Ireland subsidiaries sell both ethical products requiring a doctor's prescription and over-the-counter preparations. Their most important products include SudocremÂ®, a topical preparation for the treatment of diaper rash; ColomycinÂ®, an antibiotic used in the treatment of cystic fibrosis; InfacolÂ®, used to treat infant colic; and ExorexÂ®, used in the treatment of eczema and psoriasis.

The pharmaceutical industry is highly competitive as to the sale of products, research for new or improved products and the development and application of competitive drug formulation and delivery technologies. There are numerous companies in the United States and abroad engaged in the manufacture and sale of both proprietary and generic drugs of the kind which we sell. Many of these companies have substantially greater financial resources than we do. We also face competition for the acquisition or licensing of new product opportunities from other companies. In addition, the marketing of pharmaceutical products is increasingly affected by the growing role of managed care organizations, including pharmaceutical benefit management companies, in the provision of health services. Such organizations negotiate with pharmaceutical manufacturers for highly competitive prices for pharmaceutical products in equivalent therapeutic categories, including certain of our principal promoted products. Failure to be included or to have a preferred position in a managed care organization's drug formulary could result in decreased prescriptions of a manufacturer's products.

Government Regulation

The pharmaceutical industry is subject to comprehensive government regulation which substantially increases the difficulty and cost incurred in obtaining the approval to market newly proposed drug products and maintaining the approval to market existing drugs. In the United States, products which we develop, manufacture or sell are subject to regulation by the FDA, principally under the Federal Food, Drug and Cosmetic Act, as well as by other federal and state agencies. The FDA regulates all aspects of the testing, manufacture, safety, labeling, storage, record keeping, advertising and promotion of new and old drugs, including the monitoring of compliance with good manufacturing practice regulations. Non-compliance with applicable requirements can result in fines and other sanctions, including the initiation of product seizures, injunction actions and criminal prosecutions based on practices that violate statutory requirements. In addition, administrative remedies can involve voluntary recall of products as well as the withdrawal of approval of products in accordance with due process procedures. Similar regulations exist in most foreign countries in which our products are manufactured or sold. In many foreign countries, such as the United Kingdom, reimbursement under national health insurance programs frequently require that manufacturers and sellers of pharmaceutical products obtain government approval of initial prices and increases if the ultimate consumer is to be eligible for reimbursement for the cost of such products.

During the past several years, the FDA, in accordance with its standard practice, has conducted a number of inspections of our manufacturing facilities. Following these inspections, the FDA called our attention to certain "Good Manufacturing Practices" compliance and record keeping deficiencies. We have responded to the FDA's comments and modified our procedures to comply with the requests made by the FDA.

The cost of human healthcare products continues to be a subject of investigation and action by governmental agencies, legislative bodies and private organizations in the United States and other countries. In the United States, most states have enacted generic substitution legislation requiring or permitting a dispensing pharmacist to substitute a different manufacturer's version of a drug for the one prescribed. Federal and state governments continue to press efforts to reduce costs of Medicare and Medicaid programs, including restrictions on amounts agencies will reimburse for the use of products. In addition, several states have adopted prescription drug benefit programs which supplement Medicaid programs and are seeking discounts or rebates from pharmaceutical manufacturers to subsidize such programs. Failure to provide such discounts or rebates may lead to restrictions upon the availability of a manufacturer's products in health programs, including Medicaid, run by such states. Under the Omnibus Budget Reconciliation Act of 1990 (or OBRA), manufacturers must pay certain statutorily-prescribed rebates on Medicaid purchases for reimbursement of prescription drugs under state Medicaid plans. Federal Medicaid reimbursement for drug products of original NDA-holders is denied if less expensive generic versions are available from other manufacturers. In addition, the Federal government follows a diagnosis related group (or DRG) payment system for certain institutional services provided under Medicare or Medicaid. The DRG system entitles a healthcare facility to a fixed reimbursement based on discharge diagnoses rather than actual costs incurred in patient treatment, thereby increasing the incentive for the facility to limit or control expenditures for many healthcare products. Under the Prescription Drug User Fee Act of 1992, the FDA has imposed fees on various aspects of the approval, manufacture and sale of prescription drugs.

In April 2003, the Federal Office of the Inspector General published guidance for pharmaceutical manufacturers with respect to compliance programs to assure manufacturer compliance with Federal laws and programs relating to healthcare. In addition, several states have adopted laws and regulations requiring certain specific disclosures with respect to our compliance program and our practices relating to interactions with physicians and other healthcare providers. We maintain a compliance program to assure compliance with applicable laws and regulations, as well as the standards of professional bodies governing interactions between pharmaceutical manufacturers and physicians, and believe we are in compliance with all material legal requirements and standards.

A prescription-drug benefit for Medicare beneficiaries was established pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Under the program, pharmaceutical benefit managers and health programs offer discounted prices on prescription drugs to qualified Medicare recipients reflecting discounts negotiated with manufacturers. The failure of a manufacturer to offer discounts to these programs could result in reduced use of the manufacturer's products.

In March 2004, the FDA issued a public health advisory that requires companies that manufacture SSRI antidepressants, including Forest, to revise their products' labels to include detailed warnings about the potential for suicidal tendencies in adolescent patients who take the medications. FDA officials noted that studies have not established a link between suicidal tendencies and such antidepressants and our analysis of clinical data involving Lexapro and Celexa indicates no such link. We have implemented revised labeling in accordance with FDA requirements. The FDA has recently completed a review of potential suicidality in the adult population and has requested certain additional label changes which we are in the process of implementing. There can be no assurance that such labeling changes or changes which may be required by subsequent rule making will not have an adverse effect upon the marketing of our antidepressant products. In addition, the FDA continues to review various aspects of our NDAs and product labeling for approved products as we submit supplements seeking approval for new indications or dosage forms, labeling changes or to comply with FDA requests, and at the agencyâ€™s own initiative in light of post-marketing experience. In connection with such reviews, the FDA may request labeling changes based on the data submitted by us or from other sources, including post-marketing experience data. Sometimes those requested changes may apply to an entire class of drugs which includes one of our products, and sometimes the changes requested may apply only to our product. In some cases, the labeling changes requested, if implemented, might adversely affect the prescribing of our products by physicians. If we believe changes requested by the FDA are not correct, we may submit further data and analyses to the FDA which may modify the agencyâ€™s position. There can be no assurance, however, that the FDA will ultimately agree with our position or that post-marketing clinical experience will not require labeling changes, either initiated by us or by the FDA, which may adversely affect our productsâ€™ acceptance and utilization.

We expect that competing healthcare reform proposals will continue to be introduced and debated. The adoption of any such proposal may entail new regulatory requirements and may affect the marketing of prescription drugs. We cannot predict the outcome or effect on the marketing of prescription drug products of the legislative and political process.

Environmental Standards

We anticipate that the effects of compliance with federal, state and local laws and regulations relating to the discharge of materials into the environment will not have any material effect on our capital expenditures, earnings or competitive position.

Raw Materials

The active pharmaceutical ingredients in our principal promoted products, including Lexapro, Namenda and Campral, are patented or otherwise available to us only pursuant to our contractual arrangements with our licensing partners. Other raw materials used by us are purchased in the open market. We have not experienced any significant shortage in supplies of active pharmaceutical ingredients or other raw materials.

Product Liability Insurance

We currently maintain $140 million of product liability coverage per "occurrence" and in the aggregate. Although in the past there have been product liability claims asserted against us, none for which we have been found liable, there can be no assurance that all potential claims which may be asserted against us in the future would be covered by our present insurance.

Research and Development

During the year ended March 31, 2007, we spent $941,003,000 for research and development, as compared to $410,431,000 and $293,659,000 in the fiscal years ended March 31, 2006 and 2005, respectively. Included in research and development expense are payments made pursuant to licensing agreements for new product opportunities where FDA approval has not yet been received and accordingly payments made in connection with acquiring the product rights are charged to research and development. Research and development expenses for fiscal 2007 included approximately $494,000,000 of acquisition and related costs incurred in the acquisition of Cerexa, which was treated as the acquisition of in-process research and development and approximately $80,000,000 in upfront license and milestone payments. With respect to the 2006 fiscal year, such payments included upfront and milestone payments of $75,000,000 and $60,000,000 to Mylan Laboratories, Inc. and Replidyne, Inc., respectively, in connection with our acquisition of rights to nebivolol and faropenem medoxomil. During fiscal 2007, we terminated our further participation in faropenem development. Other research and development expenditures consist primarily of the conduct of pre-clinical and clinical studies required to obtain approval of new products, as well as clinical studies designed to further differentiate our products from those of our competitors or to obtain additional labeling indications.

Employees

At March 31, 2007, we had a total of 5,126 employees.

Patents and Trademarks

Forest owns or licenses certain U.S. and foreign patents and patent applications on many of its branded products and products in development, pursuant to license arrangements (see Recent Developments). Celexa is no longer subject to exclusivity under the Hatch-Waxman Act and is now subject to generic competition. Lexapro is covered by a U.S. patent which expires in 2012. Namenda is covered by a U.S. patent which expires in 2010 and should be subject to a patent term extension until September 2013. See "Item 3. Legal Proceedings " for a description of certain challenges to the validity of our Lexapro patent licensed from Lundbeck. We believe these patents and other rights are or may become of significant benefit to our business.

We own or exclusively license various trademarks and trade names which we believe are of significant benefit to our business.

Backlog - Seasonality

Backlog of orders is not considered material to our business prospects. Our business is not seasonal in nature.

CEO BACKGROUND

Howard Solomon

Chairman of the Board and Chief Executive Officer. Mr. Solomon has served as our Chief Executive Officer since 1977.

Lawrence S. Olanoff, M.D., Ph.D.
President and Chief Operating Officer since October 2006. President and Chief Executive Officer at Celsion Corporation from July 2005 to October 2006. For the ten years prior to July 2005, Dr. Olanoff served as Executive Vice President Chief Science Officer at Forest.

William J. Candee, III
Co-Chairman of the Board of Directors and a principal of TXX Services, LLC, a transportation company with operations in New York, New Jersey and Connecticut. For more than 5 years prior to June 2004, Mr. Candee was a member of or of counsel to the law firm of Rivkin Radler, LLP.

George S. Cohan
President, The George Cohan Company, Inc., consultants, since June 1989.

Kenneth E. Goodman
Until his retirement in September 2006, Mr. Goodman served as President and Chief Operating Officer since December 1998. For eighteen years prior thereto, Mr. Goodman served as Vice President â€“ Finance and Chief Financial Officer and in addition served as Executive Vice President â€“ Operations since February 1998.

Lester B. Salans, M.D.
Clinical Professor and member of the Clinical Attending Staff Internal Medicine, Mount Sinai Medical School and member of the Adjunct Faculty, Rockefeller University. Dr. Salans was Vice President â€“ Academic and Scientific Affairs and Vice President â€“ Preclinical Research at Sandoz Pharmaceutical Corporation.

Dr. Ivan Gergel was promoted to Senior Vice President â€“ Scientific Affairs on May 19, 2005. From January 2000 until his promotion, Dr. Gergel served as our Vice President â€“ Clinical Development and Medical Affairs and from January 2005 also served as our Chief Medical Officer. Dr. Gergel joined us in June 1998 as Executive Director, Clinical Research. Prior to joining Forest, Dr. Gergel was Group Director â€“ Clinical Research and Medical Affairs at SmithKline Beecham.

Elaine Hochberg is our Senior Vice President â€“ Marketing since December 1999. Ms. Hochberg joined us in June 1997 as Vice President â€“ Marketing of our wholly-owned subsidiary Forest Pharmaceuticals, Inc. In February 1998, she was promoted to Vice President â€“ Marketing. Prior to joining us in 1997, Ms. Hochberg was Assistant Vice President â€“ Marketing at Wyeth-Lederle Laboratories.

Francis I. Perier, Jr. is our Senior Vice President â€“ Finance and Chief Financial Officer since September 2004. From March 2004 until joining us in September 2004, Mr. Perier was Vice President â€“ Finance â€“ Operations Planning â€“ Americas Medicines at Bristol-Myers Squibb. For eight years prior to March 2004, Mr. Perier served in senior financial positions at Bristol-Myers Squibb including four years as Vice President â€“ Finance, Planning, Business Development and Information Technology at its ConvaTec Division. Prior to that, Mr. Perier had been a partner at Deloitte & Touche, LLP.

COMPENSATION

Chief Executive Officer. Following its discussion and analysis of the above factors, and specifically taking note of Mr. Solomonâ€™s continued leadership and commitment to advancing our growth through the licensing of new products and entry into strategic alliances for the development of new products, the Compensation Committee approved the following compensation for Mr. Solomon, our CEO: an increase in salary of approximately 5.5% from $1,090,000 to $1,150,000 and a 2006 bonus of $600,000 which reflected an increase of $75,000 over the previous year. The Compensation Committee recognized that the bonus for the previous year had represented a $55,000 decrease from the previous yearâ€™s bonus. With respect to long term incentive compensation, the Committee granted Mr. Solomon 200,000 stock options. As is the Committeeâ€™s practice, the size of the option grant reflected the Committee's view of Mr. Solomonâ€™s contribution toward achievement of objectives relating to long-term growth strategies during the year and gave consideration to the appropriate size of a grant based on comparable information on grants provided to persons occupying the same position at comparable companies, and taking into account the number of options granted to other executive officers of the Company.

Chief Operating Officer. Effective October 30, 2006, Dr. Olanoff was appointed to the position of President and COO of Forest. The Compensation Committee reviewed the role of the President and COO, taking note of the number of direct reports and the level of responsibility associated with the position. In addition, the Committee reviewed Dr. Olanoffâ€™s background and qualifications for the position, acknowledging his significant experience in the pharmaceutical industry, his position immediately prior to rejoining Forest as the chief executive officer of another pharmaceutical company, and his unique understanding of Forest and its operations based on his prior tenure as Executive Vice President â€“ Scientific Affairs and the Chief Science Officer of Forest. Based on its evaluation of the requirements of the position and Dr. Olanoffâ€™s qualifications to fulfill such requirements, the Compensation Committee determined to maintain the same salary level previously paid in connection with the position and to provide for a target bonus range which reflected the bonus previously paid to our COO. In addition, the Compensation Committee provided for an equity grant which reflected the Compensation Committeeâ€™s view of the appropriate level of the equity position of our COO and its objective of aligning the interests of the officer with the long-term growth of Forest.

Based on the above analysis, the Compensation Committee approved an offer letter between Forest and Dr. Olanoff, effective October 30, 2006, pursuant to which Dr. Olanoff was awarded an annual base salary of $750,000, is eligible for an annual bonus targeted at 40% to 50% of his annual base salary, and was granted 250,000 stock options. The offer letter is described under the heading "Employment Agreement" on Page 17 of this Proxy.

As Dr. Olanoffâ€™s annual base salary was established in his offer letter, at its December meeting, the Compensation Committee only determined the 2006 bonus payable to Dr. Olanoff. Based on its review of the Companyâ€™s performance and Dr. Olanoffâ€™s contributions since the commencement of his employment, the Compensation Committee awarded Dr. Olanoff a bonus of $100,000.

Since Mr. Goodman retired from service as Forestâ€™s President and COO effective October 30, 2006, the Compensation Committee only determined the bonus payable to Mr. Goodman for his service during calendar year 2006. Based on its evaluation of our performance as described above and Mr. Goodmanâ€™s contributions to our growth during the year, the Compensation Committee awarded him a bonus of $385,000.

Other Executive Officers. The Compensation Committee also reviewed and approved merit increases to salary, bonuses and equity awards for the other executive officers, including the other Named Executive Officers, based on the criteria and pursuant to the process described above

MANAGEMENT DISCUSSION FROM LATEST 10K

This year marked continued growth of our key marketed products, continued investment in research and development to enhance and develop our current pipeline of products as well as changes in our Executive management. For the fiscal year ended March 31, 2007, total net revenues increased by $479,395 to a record high of $3,441,785 as a result of increased sales growth of LexaproÂ® and NamendaÂ®, and higher co-promotion income of BenicarÂ®.

On January 10, 2007, we acquired Cerexa, Inc. (Cerexa), a biopharmaceutical company based in Alameda, California for approximately $494,000 in a merger pursuant to which Cerexa became a wholly-owned subsidiary. Pursuant to the merger we acquired worldwide development and marketing rights (excluding Japan) to ceftaroline acetate (ceftaroline), a next generation, broad spectrum, hospital-based injectable cephalosporin antibiotic and ME1036 a second development stage hospital-based antibiotic. In addition to the initial cash consideration, the Company will be obligated to pay an additional $100,000 in the event that annual United States sales of ceftaroline exceed $500,000 during the five year period following product launch.

In April 2006, we entered into a collaboration agreement with Almirall Prodesfarma, S.A. for the U.S. rights to aclidinium (LAS 34273), a long-acting muscarinic antagonist which is being developed for the treatment of chronic obstructive pulmonary disease (COPD).

On September 5, 2006, our Board of Directors appointed Lawrence S. Olanoff, M.D., Ph.D. as President and Chief Operating Officer and as a Director. Dr. Olanoff rejoined Forest on October 30, 2006, having served as our Executive Vice President and Chief Scientific Officer for the ten years ended July 2005. Dr. Olanoff succeeded Kenneth E. Goodman who retired after 26 years with Forest. Mr. Goodman remains a member of our Board of Directors.

During fiscal 2006, our Board of Directors authorized a share repurchase program for up to 25 million shares of common stock. As of March 31, 2006 all of these shares were repurchased, completing the program. In May 2006, our Board of Directors authorized a new share repurchase program (the 2007 Repurchase Program) for up to 25 million shares of our common stock. The authorization became effective immediately and has no set expiration date. As of May 29, 2007, 10.3 million shares have been repurchased at a cost of $472,279 and we continue to have authority to purchase up to an additional 14.7 million shares under the 2007 Repurchase Program.

Financial Condition and Liquidity

Net current assets increased by $8,889 for fiscal 2007 principally due to cash, marketable securities and accounts receivable from ongoing operations. During fiscal 2007 we had significant outlays of cash. During the first three quarters, pursuant to the 2007 Repurchase Program, we repurchased 10.3 million shares at a cost of $472,279. No shares were repurchased during the fourth quarter and 14.7 million shares remain available for repurchase. During the fourth quarter, we paid approximately $494,000 in connection with our acquisition of Cerexa. Despite these payments, cash and marketable securities increased as a result of our strong operations. Long-term marketable securities increased, as certain funds, not required to fund the Cerexa acquisition or share repurchase program, were shifted to longer-term, principally auction rate notes, in order to receive more favorable rates of return. Accounts receivable increased due to higher trade receivables from sales of our principal branded products offset by a decrease in other accounts receivable due to the timing of payments from Daiichi Sankyo for our co-promotion of Benicar. Raw material and finished goods inventory levels decreased during the period

as we continued our program of reducing Lexapro, Namenda and Campral inventories to normal, post-launch requirements. Increases to accounts payable, accrued expenses and income taxes payable were all the result of normal operating activities.

Property, plant and equipment decreased from fiscal 2006, due to depreciation expense recorded during the year and the closure during the fourth quarter of our manufacturing facilities located in Inwood, New York. These operations were relocated to certain of our other locations to gain efficiencies. We are in the process of negotiating the sale of the Inwood property, buildings and certain machinery and equipment, which is expected to be completed later this year. The value of the idle assets available for sale has been reclassified from property, plant and equipment to other assets. During the year, we completed several major expansion and renovation projects. We currently have only one major facilities expansion underway, the refurbishing of a 90,000 square foot plant in Ireland which will provide redundancy for the manufacture of Lexapro and Namenda and additional capacity for future products. We also continued to make technology investments to expand our principal operating systems to include salesforce and warehouse management applications.

On May 18, 2006, the Board authorized the 2007 Repurchase Program for up to 25 million shares of common stock. As of May 29, 2007, we have repurchased a total of 10.3 million shares under this program at an average price of $45.79 and a cost of $472,279, leaving us the authority to purchase 14.7 million more shares.

Management believes that current cash levels, coupled with funds to be generated by ongoing operations, will continue to provide adequate liquidity to facilitate potential acquisitions of products, payment of achieved milestones, capital investments and continued share repurchases.

Off-Balance Sheet Arrangements

Forest is a party to several license agreements for products currently under development. Such agreements may require us to make future payments to the licensors, subject to the achievement of specific product or commercial development milestones, as defined.

Results of Operations

In fiscal year 2007, net sales increased $389,390 from $2,793,934 to $3,183,324, a 13.9% increase from fiscal year 2006 primarily due to strong sales of Lexapro and Namenda. Lexapro, our most significant product, with sales of $2,105,990 in fiscal year 2007, grew 12.4% and contributed $232,735 to the net sales change, of which $136,196 was due to price and $96,539 was related to volume. Lexapro achieved an 18.5% share of total prescriptions for antidepressants in the SSRI/SNRI category . We expect Lexapro to remain strong during fiscal 2008. In fiscal 2004, we, along with our licensing partner, H. Lundbeck A/S (Lundbeck) filed suit against Teva Pharmaceuticals (Teva) for patent infringement related to our Lexapro patent. A trial was held regarding the patent litigation with Teva in March 2006 and on July 13, 2006, the U.S. District Court for the District of Delaware determined that the patent covering Lexapro is valid and enforceable. Lexaproâ€™s patent is set to expire in March 2012. Teva has filed an appeal of the courtâ€™s ruling. Briefing and oral argument have been completed and a decision is expected prior to the end of calendar 2007. Another generic manufacturer, Caraco Pharmaceuticals Laboratories, Ltd. (Caraco), has filed an ANDA with a Paragraph IV Certification for a generic equivalent to Lexapro. Forest and Lundbeck have filed a lawsuit in the U.S. District Court for the Eastern District of Michigan against Caraco for patent infringement.

Sales of Namenda, our N-methyl-D-aspartate (NMDA) receptor antagonist for the treatment of moderate to severe Alzheimer's disease grew 30.0%, an increase of $152,252 to $660,295 in fiscal 2007, as compared to $508,043 in fiscal 2006, of which $143,174 was due to volume and $9,078 was due to price. Namenda achieved a 32.8% share of total prescriptions in the Alzheimer's market as of March 31, 2007. We anticipate Namenda continuing positive growth through fiscal 2008. Namenda is covered by a U.S. patent which expires in 2010 and should be subject to a patent term extension until September 2013. Namenda was the first product indicated for the treatment of moderate to severe Alzheimer's disease and has generated significant new prescriptions in the retail and long-term care markets.

CampralÂ®, our treatment for maintenance of abstinence from alcohol in patients with alcohol dependence who are abstinent at treatment initiation, was launched in the fourth quarter of fiscal 2005 and its sales amounted to $29,649 for fiscal 2007, a 29.7% increase compared to $22,868 in fiscal 2006. Sales of TiazacÂ® amounted to $50,199, in fiscal 2007 as compared to $67,002 in fiscal 2006. During the December quarter, a third generic equivalent to Tiazac was launched into the market. This may result in reduced average selling prices and lower sales of Tiazac in the future. The remainder of the net sales change for the period was due principally to volume fluctuations of our older and non-promoted product lines.

In fiscal year 2006, net sales decreased $258,474 to $2,793,934, an 8.5% decrease from fiscal year 2005 primarily due to generic competition for Celexa. Sales of Celexa were $658,014 in fiscal 2005, compared with $19,006 in fiscal 2006 for both the brand and generic combined. Partially offsetting the losses from Celexa were strong sales of Lexapro and Namenda. Sales of Lexapro grew 16.7% to $1,873,255 for fiscal 2006, and contributed $267,959 to the net sales change, of which $184,809 was due to volume and $83,150 was due to price and as of March 31, 2006 achieved a 20.2% share of total prescriptions for antidepressants in the SSRI/SNRI category. Sales of Namenda, launched in March 2004, grew 52.7%, an increase of $175,336 to $508,043 in fiscal 2006, as compared to $332,707 in fiscal 2005, of which $150,169 was due to volume and $25,167 was due to price. Namenda achieved a 29.8% share of total prescriptions in the Alzheimer's market as of March 31, 2006. Sales of Campral amounted to $22,868 for fiscal 2006 compared to $3,199 in fiscal 2005. Sales of CombunoxÂ® amounted to $8,283 for fiscal 2006 as compared to $4,049 in fiscal 2005. As of April 1, 2006, detailing of this product to physicians was discontinued. Tiazac sales declined $36,808 from fiscal 2005 due primarily to generic competition. Flumadine sales decreased $33,768 due to volume as a result of a one-time order from the Centers for Disease Control in fiscal 2005 in response to a flu vaccine shortage. The remainder of the net sales change for the period was due principally to volume fluctuations of our older non-promoted product lines.

Contract revenue for fiscal 2007 was $176,943 compared to $118,170 in fiscal 2006 and $61,369 in fiscal 2005, primarily due to co-promotion income from our co-marketing agreement with Daiichi Sankyo for Benicar. Under the terms of the agreement, Forest has been co-promoting Benicar since May 2002 and is entitled to a share of the product profits (as defined) from the point the product becomes cumulatively profitable. Benicar became cumulatively profitable during the second quarter of fiscal 2005.

Other income increased in fiscal 2007 and fiscal 2006 primarily due to higher interest income received on funds available for investment resulting from more favorable rates of return.

Cost of sales as a percentage of net sales was 23% in fiscal 2007 unchanged from fiscal years 2006 and 2005. Pretax stock-based compensation expense related to the adoption of SFAS 123R totaled $1,520 for fiscal 2007 and no such expense was recorded in either fiscal 2006 or fiscal 2005.

Selling, general and administrative expense increased to $1,046,336 in fiscal 2007 from $1,031,451 in fiscal 2006 and $993,715 in fiscal 2005. Fiscal 2007 included pretax stock-based compensation expense related to the adoption of SFAS 123R of $30,293 and no such expense was recorded in either fiscal 2006 or fiscal 2005. The increase of $37,736 in fiscal 2006 as compared to fiscal 2005 was due in large measure to the activities of our salesforce surrounding the launch of Campral and Combunox and additional product license amortization expense on these newly launched products.

Research and development expense increased to $941,003 in fiscal 2007 from $410,431 in fiscal 2006 and $293,659 in fiscal 2005. Fiscal 2007 includes a one-time charge of $476,000 for in-process research and development (IPR&D) related to the acquisition of Cerexa. Excluding this one-time IPR&D charge, research and development expense increased 13% to $465,003 in 2007 from $410,431 in 2006. During the 2007 fiscal year we also paid $20,000 in connection with a development milestone and pretax stock-based compensation expense related to the adoption of SFAS 123R totaled $8,957 for the fiscal year ended March 31, 2007. No such expense was recorded in either fiscal 2006 or fiscal 2005. The increase in research and development expense in fiscal 2006 as compared with fiscal 2005 was due in large measure to upfront and milestone payments made in connection with licensing agreements.

Research and development expense also reflects the following:

As a result of the Cerexa acquisition during the fourth quarter of fiscal 2007, we acquired worldwide development and marketing rights (excluding Japan) to ceftaroline, a next generation, broad spectrum, hospital-based injectable cephalosporin antibiotic. Ceftaroline is being developed initially for the cSSSI indication and the treatment of community acquired pneumonia (CAP). Phase III studies of ceftaroline for cSSSI began in February 2007. The acquisition of Cerexa also included a second development-stage hospital-based antibiotic, ME1036, which has shown activity against both aerobic and anaerobic gram-positive and gram-negative bacteria, including common drug-resistant pathogens, such as MRSA, in preclinical studies. ME1036 is expected to enter Phase I studies later this year. The rights to ceftaroline and ME1036 are in-licensed by Cerexa on an exclusive basis from Takeda Pharmaceutical Company and Meiji Seika Kaisha, Ltd., respectively.

We engaged an independent third party to assist in the valuation of assets. Of the $494,000 consideration paid, approximately $476,000 was allocated as in-process research and development. The IPR&D represents the value assigned to the two compounds ceftaroline and ME1036, neither of which has achieved regulatory approval. The IPR&D was expensed in fiscal year 2007 since these rights do not have any alternative future use. This charge was not deductible for tax purposes.

In order to determine the estimated fair value of IPR&D, we utilized the "income method". This method applies a probability weighting to the estimated future net cash flows that are derived from projected sales revenues and estimated costs, which considers applicable economic, industry and competitive environments, including relevant historical and future estimated trends. The estimated future net cash flows were then discounted to the present value using an appropriate discount rate of 16% in valuing each of these compounds independently.

In April 2006, we entered into a collaboration agreement with Almirall Prodesfarma, S.A. for the U.S. rights to aclidinium (LAS 34273), a long-acting muscarinic antagonist which is being developed as an inhaled therapy for the treatment of chronic obstructive pulmonary disease (COPD). In connection with this agreement, Almirall received an upfront license payment of $60,000 and an additional development milestone in May 2007. We are currently conducting two large phase III international studies in COPD and expect results in the second half of calendar 2008.

During the fourth quarter of fiscal 2006, we entered into an agreement with Mylan Laboratories Inc. (Mylan) for the commercialization, development and distribution rights for nebivolol, a novel beta blocker. In May 2005, Mylan received an "approvable" letter from the FDA for nebivolol for the treatment of hypertension. Final approval is contingent upon the review of certain additional pre-clinical data requested by the FDA. We and Mylan expect the FDA to complete its review prior to the end of calendar 2007. Nebivolol is also being studied for the treatment of congestive heart failure (CHF). We have completed the data analysis of a Phase III study and are continuing to assess the appropriate timing of a submission for this indication.

â€˘ A once-daily formulation of Namenda is currently in a Phase III Alzheimerâ€™s disease study as to which results are expected to be available in early calendar 2008.

â€˘ Also during the fourth quarter of fiscal 2006, we entered into an agreement with Replidyne, Inc. for the U.S. rights to faropenem medoxomil, a novel antibiotic being developed for upper respiratory and skin infections. Effective February 6, 2007, the collaboration was terminated because we believe the FDAâ€™s non-approvable letter raises regulatory uncertainty. We reached this conclusion after careful review of all the existing data and the FDAâ€™s pronouncements. There were no payments to Repledyne associated with the termination.

During the third quarter of fiscal 2006, we entered into an agreement with Gedeon Richter Limited for the U.S. and Canadian rights to RGH-896, a compound being developed for the treatment of chronic pain and other CNS conditions and a group of novel compounds that target the group 1 metabotropic glutamate receptors (mGLUR1/5).

â€˘ On May 22, 2007 we announced that top-line results of a Phase III study demonstrated statistically significant therapeutic effects of milnacipran as a treatment of fibromyalgia syndrome (FMS). Subject to a favorable review of the full study results for the just completed trial and based in part on communication with the FDA, we plan to submit an NDA including data from this study and an earlier Phase III study around the end of calendar 2007. A third randomized pivotal Phase III study, which was commenced in early 2006, is expected to have results in the first half of 2008.

â€˘ During the first quarter of fiscal 2006, we received the results of a recently completed placebo-controlled proof of concept study of neramexane in the treatment of Alzheimer's disease. The study showed sufficient clinical activity, safety and tolerability for us to continue development of the compound.

â€˘ During the third quarter of fiscal 2005, Forest entered into a collaboration agreement with Gedeon Richter Limited for the North American rights to RGH-188, a compound which is being developed for the treatment of schizophrenia, bipolar mania and other psychiatric conditions. Phase II testing in schizophrenia has been initiated and we anticipate results prior to the end of calendar 2007. A second Phase II study in bipolar study was commenced in April 2007 and we expect results sometime in 2008.

â€˘ During the second quarter of fiscal 2005, Forest entered into a collaboration agreement with Glenmark Pharmaceuticals S.A. for the North American development and marketing of GRC 3886, a PDE4 inhibitor which will be developed for the treatment of asthma and COPD. The initiation of large scale Phase II testing, originally scheduled for calendar 2006, has been delayed pending the provision of certain additional pre-clinical data to the FDA.

â€˘ During the first quarter of fiscal 2005, we entered into an agreement with PAION GmbH for the development and marketing of desmoteplase, a novel drug currently in a Phase II(b)/III clinical study for the treatment of acute ischemic stroke. Enrollment was completed at the end of calendar 2006. We expect that study results will be available in June 2007.

The effective tax rate increased to 21% in fiscal 2007 (excluding the one-time Cerexa IPR&D charge) as compared to 19% and 29% in fiscal years 2006 and 2005, respectively. The effective tax rate for fiscal 2007 was higher compared to fiscal 2006 due primarily to a one-time reversal in the first quarter of fiscal 2006 of $36,414 related to the fiscal 2005 charge of $90,657 for the repatriation of dividends pursuant to the American Jobs Creation Act of 2004. Excluding this impact, the effective tax rate would have been 23% and 22% in fiscal 2006 and fiscal 2005, respectively, and is lower than the U.S. statutory tax rate principally due to the proportional mix of earnings generated in lower-taxed foreign jurisdictions versus the United States. These earnings include manufacturing and development income from our operations in Ireland, which are taxed at 10% through 2010 and at 12.5% thereafter.

We expect to continue our profitability into fiscal 2008 with continued growth in our principal promoted products.

Inflation has not had a material effect on our operations for the periods presented.

Critical Accounting Policies

The following accounting policies are important in understanding our financial condition and results of operations and should be considered an integral part of the financial review. Refer to the notes to the consolidated financial statements for additional policies.

Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting period. Estimates are made when accounting for sales allowances, returns, rebates and other pricing adjustments, depreciation, amortization and certain contingencies. Forest is subject to risks and uncertainties, which may include but are not limited to competition, federal or local legislation and regulations, litigation and overall changes in the healthcare environment that may cause actual results to vary from estimates. We review all significant estimates affecting the financial statements on a recurring basis and record the effect of any adjustments when necessary. Certain of these risks, uncertainties and assumptions are discussed further under the section entitled "Forward Looking Statements".

Stock-Based Compensation

On April 1, 2006, we adopted SFAS 123R "Share-Based Payment" under the modified prospective method. Since we had previously accounted for stock options under Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" we recorded stock option expense in fiscal 2007 while no expense was recorded in fiscal years 2006 and 2005.

Also under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously established upon grant are reported as financing on the consolidated statements of cash flows. Prior to adoption, such tax benefits were reported as an increase to operating activities. The adoption of SFAS 123R did not have a significant impact on our financial position or results of operations.

We account for our employee stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock at the date of grant and generally have a 5 to 10 year term. The fair value of stock option grants is amortized to expense on an even basis over the vesting period.

Revenue Recognition

Revenues are recorded in the period the merchandise is shipped. As is typical in the pharmaceutical industry, gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations. These deductions represent estimates of the related liabilities and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments for actual future settlements have not been material, and have resulted in either a net increase or a net decrease to net income. If estimates are not representative of actual settlement, results could be materially affected. Provisions for estimated sales allowances, returns, rebates and other pricing adjustments are accrued at the time revenues are recognized as a direct reduction of such revenue.

The accruals are estimated based on available information, including third party data, regarding the portion of sales on which rebates and discounts can be earned, adjusted as appropriate for specific known events and the prevailing contractual discount rate. Provisions are reflected either as a direct reduction to accounts receivable or, to the extent that they are due to entities other than customers, as accrued expense. Adjustments to estimates are recorded when customer credits are issued or payments are made to third parties.

The sensitivity of estimates can vary by program and type of customer. However, estimates associated with Medicaid and contract rebates are most at risk for adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can range up to one year. Because of this time lag, in any given quarter, adjustments to actual may incorporate revisions of prior quarters.

Provisions for Medicaid and contract rebates during a period are recorded based upon the actual historical experience ratio of rebates paid and actual prescriptions written. The experience ratio is applied to the period's sales to determine the rebate accrual and related expense. This experience ratio is evaluated regularly to ensure that the historical trends are as current as practicable. As appropriate, we will adjust the ratio to more closely match the current experience or expected future experience. In assessing this ratio, we consider current contract terms, such as the effect of changes in formulary status, discount rate and utilization trends. Periodically, the accrual is adjusted based upon actual payments made for rebates. If the ratio is not indicative of future experience, results could be affected. Rebate accruals for Medicaid were $30,606 at March 31, 2007 and $39,209 at March 31, 2006. Commercial discounts and other rebate accruals were $115,893 at March 31, 2007 and $54,927 at March 31, 2006. These and other rebate accruals are established in the period the related revenue was recognized, resulting in a reduction to sales and the establishment of a liability, which is included in accrued expenses.

Deductions for chargebacks (primarily discounts to group purchasing organizations and federal government agencies) closely approximate actual as these deductions are settled generally within 2-3 weeks of incurring the liability.

Forest's policy relating to the supply of inventory at wholesalers is to maintain stocking levels of up to three weeks and to keep monthly levels consistent from year to year, based on patterns of utilization. We have historically closely monitored wholesale customer stocking levels by purchasing information directly from customers and by obtaining other third party information. Unusual or unexpected variations in buying patterns or utilizations are investigated.

Sales incentives are generally given in connection with a new product launch. These sales incentives are recorded as a reduction of revenues and are based on terms fixed at the time goods are shipped. New product launches may result in expected temporary increases in wholesaler inventories, which as described above, are closely monitored and historically have not resulted in increased product returns.

Forward Looking Statements

Except for the historical information contained herein, the Management Discussion and other portions of this Annual Report contain forward looking statements that involve a number of risks and uncertainties, including the difficulty of predicting FDA approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the timely development and launch of new products, changes in laws and regulations affecting the healthcare industry and the risk factors listed from time to time in our filings with the SEC, including the Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, operations may be exposed to fluctuations in currency values and interest rates. These fluctuations can vary the costs of financing, investing and operating transactions. Because we had no debt and only minimal foreign currency transactions, there was no material impact on earnings due to fluctuations in interest and currency exchange rates.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Total net revenues increased for the quarter and six months ended September 2007 due to growth of our key marketed products LexaproÂ® and NamendaÂ® and higher co-promotion income from BenicarÂ®. During the September 2007 quarter, we entered into a collaboration agreement with Microbia, Inc. (Microbia) to co-develop and co-market the compound linaclotide. Linaclotide, which is currently in Phase II testing, is being investigated for the treatment of constipation-predominant irritable bowel syndrome and chronic constipation. In connection with the signing of this agreement, Forest recorded a $70,000 licensing fee, which was charged to research and development expense. As a result of this charge, net income during the September 2007 quarter was lower than net income during the September 2006 quarter. For the six months ended September 2007 net income increased 12% when compared with the same six-month period of the prior year. Last yearâ€™s six months research and development expense included a licensing payment of $60,000 to Laboratorios Almirall, S.A. (Almirall) for the U.S. rights to aclidinium, a long-acting muscarinic antagonist being developed for the treatment of chronic obstructive pulmonary disease (COPD).

In October 2007, we signed an agreement with Daiichi Sankyo to co-promote its recently approved product, Azorâ„˘. Azor is a once-daily combination of amlodipine and olmesartan medoxomil (Benicar) for the treatment of hypertension. Under the terms of the agreement, we will co-promote the product for a period of three years and receive co-promotion fees based on net sales. We will receive residual fees at a reduced rate for the three years following the co-promotion period. In conjunction with the signing of the agreement, we paid Daiichi Sankyo $20,000.

Financial Condition and Liquidity

Net current assets increased by $329,364 from March 31, 2007. Cash and cash equivalents increased while short-term marketable securities decreased in order to fund the 2007 Repurchase Program described below. During the June 2007 quarter, we repurchased 1.8 million shares at a cost of $86,003 and in the current quarter we repurchased another 4.95 million shares at a cost of $188,801, leaving 17.9 million shares still available for repurchase. Long-term marketable securities increased as certain funds, not required to fund the share repurchase program, were shifted to longer-term, principally auction rate notes, in order to receive more favorable rates of return. Of our total cash and marketable securities position at September 30, 2007, 31%, or about $736,000, is domiciled domestically, with the remainder held by our international subsidiaries. Trade accounts receivable increased primarily due to higher sales of our principal branded products. Finished good inventory increased in order to support continued demand for our products. We believe that current inventory levels are adequate to support the growth in our ongoing business. Deferred tax assets increased as a result of the Microbia licensing agreement. Other current assets increased principally due to the renewal of insurance programs in the June 2007 quarter, which are paid in full at the time of renewal and expensed over the life of the policy years. Increases in accounts payable and accrued expenses were due to normal operating activities.

Property, plant and equipment before accumulated depreciation increased slightly from March 31, 2007. During the September 2007 quarter, we completed the refurbishment of a 90,000 square foot facility in Ireland which will provide additional capacity for the manufacturing of Lexapro and Namenda and capacity for future products, subject to FDA qualification of the facility. We also continued to make technology investments to expand our principal operating systems to include salesforce applications.

On April 1, 2007, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN 48), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109". As a result of the adoption of FIN 48, we increased our tax liabilities by $13,796 with a corresponding reduction to the April 1, 2007 balance in retained earnings. In addition, accrued interest, related to unrecognized tax benefits totaled $11,576 as of April 1, 2007. Interest and penalties, if any, are recorded in income tax expense and are classified on the balance sheet with the related tax liability. Unrecognized tax benefits totaling $152,695 have been reclassified from current income taxes payable to long-term income taxes payable and totaled $175,021 at September 30, 2007 based on our expectation of cash payments within the next twelve months.

During fiscal 2007 our Board of Directors (Board) approved the 2007 Repurchase Program which authorized the purchase of up to 25 million shares of common stock. On August 13, 2007 the Board authorized the purchase of an additional 10 million shares of common stock. In the June 2007 quarter, we repurchased 1.8 million shares at a cost of $86,003 and in the current quarter we repurchased 4.95 million shares at a cost of $188,801. As of November 8, 2007, we have repurchased a total of 18.7 million shares at a cost of $809,748 under the 2007 Repurchase Program, leaving us the authority to purchase 16.3 million more shares.

Management believes that current cash levels, coupled with funds to be generated by ongoing operations, will continue to provide adequate liquidity to facilitate potential acquisitions of products, payment of achieved milestones, capital investments and the continued share repurchases.

Results of Operations

Net sales for the three and six-month periods ended September 30, 2007 increased 8% and 10%, respectively, from the same periods last year to $842,337 and $1,684,953, primarily due to strong sales of Lexapro and Namenda. Lexapro, our SSRI for the treatment of depression and anxiety in adults and our most significant product, with net sales of $559,063 and $1,111,376 for the quarter and six months, grew 7% and 8%, respectively, and contributed $36,401 and $81,681 to the net sales change, of which $9,021 and $25,990 was due to volume and $27,380 and $55,691 was due to price. In fiscal 2004, we, along with our licensing partner, H. Lundbeck A/S (Lundbeck) filed suit against Teva Pharmaceuticals (Teva) for patent infringement related to our Lexapro patent. A trial was held regarding the patent litigation with Teva in March 2006 and on July 13, 2006, the U.S. District Court for the District of Delaware determined that the patent covering Lexapro is valid and enforceable. Lexaproâ€™s patent is set to expire in March 2012. Teva filed an appeal of the courtâ€™s ruling, and on September 5, 2007 a federal appeals court upheld the patentâ€™s validity. Another generic manufacturer, Caraco Pharmaceutical Laboratories, Ltd. (Caraco), has filed an ANDA with a Paragraph IV Certification for a generic equivalent to Lexapro. Forest and Lundbeck have filed a lawsuit in the U.S. District Court for the Eastern District of Michigan against Caraco for patent infringement.

Net sales of Namenda, an N-methyl-D-aspartate (NMDA) receptor antagonist for the treatment of moderate to severe Alzheimer's disease, grew 24% and 25% in the current quarter and six months, respectively, and totaled $192,872 and $384,591. This represents an increase of $37,286 and $77,923 as compared to the same periods last year, of which $26,516 and $59,833 was due to volume and $10,770 and $18,090 was due to price. The remainder of the net sales change for the period was due principally to price fluctuations of our older non-promoted product lines.

Contract revenue for the three and six months ended September 30, 2007 was $50,313 and $103,690, respectively, compared to $48,909 and $91,571 in the same periods last year primarily due to co-promotion income from our co-marketing agreement with Daiichi Sankyo for Benicar of $49,572 and $102,115, respectively, as compared to $48,315 and $90,031 last year. Under the terms of the agreement, fiscal 2008 is the final year of co-promotion activities and accordingly, beginning in fiscal 2009 we will receive a reduced share of product profits over the remaining six year term of the agreement.

Interest income for the current quarter increased over the same period last year primarily due to higher interest received on higher levels of invested funds and more favorable rates of return. Other income for the current six-month period included a milestone payment received related to our European development program for an inhaled cystic fibrosis product.

Cost of sales as a percentage of net sales was 22.6% and 22.3% for the three and six-month periods of the current year as compared with 23.8% and 23.5% for the prior year due mainly to manufacturing and operational efficiency gains, as well as cost savings related to the closure of our Inwood manufacturing facilities.

Selling, general and administrative expenses increased $21,431 and $38,376 for the three and six-month periods ended September 30, 2007 as compared to the same periods last year. The increase was primarily attributable to salesforce activity and promotional support for products currently marketed and pre-launch costs for nebivolol and milnacipran.

Research and development expense increased $76,986 and $74,812 in the three and six-month periods ended September 30, 2007. In September 2007 we recorded a $70,000 licensing charge in connection with the collaboration agreement with Microbia for the right to co-develop and co-market linaclotide. Linaclotide, which is currently in Phase II testing, is being investigated for the treatment of constipation-predominant irritable bowel syndrome and chronic constipation. During the June 2007 quarter we recorded approximately $28,000 in milestone expenses related to the aclidinium and milnacipran development programs. In April 2006 we recorded a $60,000 licensing charge in connection with our collaboration agreement with Almirall for the U.S. rights to aclidinium.

Research and development expense also reflects the following:

â€˘ During the fourth quarter of fiscal 2006, we entered into an agreement with Mylan Laboratories, Inc. (Mylan) for the commercialization, development and distribution rights for nebivolol, a novel beta blocker. In May 2005, Mylan received an "approvable" letter from the FDA for nebivolol for the treatment of hypertension. Final approval is contingent upon the review of certain additional data requested by the FDA. We and Mylan expect the FDA to complete its review prior to the end of calendar 2007. Nebivolol is also being studied for the treatment of congestive heart failure (CHF). We have completed the data analysis of a Phase III study and are continuing to assess the appropriate timing of a submission for this indication.

â€˘ On May 22, 2007 we announced that top-line results of a Phase III study demonstrated statistically significant therapeutic effects of milnacipran as a treatment of fibromyalgia syndrome (FMS). Subject to a favorable review of the full study results and based in part on communication with the FDA, we plan to submit an NDA including data from this study and an earlier Phase III study around the end of calendar 2007. A third randomized pivotal Phase III study, which was commenced in early 2006, is expected to have results in the middle of 2008.

â€˘ In connection with our acquisition of Cerexa, Inc. in January 2007, we acquired worldwide development and marketing rights (excluding Japan) to ceftaroline, a next generation, broad spectrum, hospital-based injectable cephalosporin antibiotic. Two Phase III studies of ceftaroline in complicated skin and skin structure infections have completed enrollment. The first of two Phase III studies in patients with community acquired pneumonia (CAP) has begun enrollment. A second Phase III study in CAP will begin enrollment shortly. We anticipate the skin and skin structure results in calendar 2008 and the CAP results in 2009.

â€˘ In April 2006, we entered into a collaboration agreement with Almirall for the U.S. rights to aclidinium, a long-acting muscarinic antagonist which is being developed as an inhaled therapy for the treatment of chronic obstructive pulmonary disease (COPD). Enrollment of two large Phase III international studies has been completed and we expect to have top-line results for these studies in the second half of calendar 2008. We and Almirall are also pursuing the development of a fixed-dose combination of aclidinium and the beta-agonist formotorol, which is currently in Phase I testing.

â€˘ A once-daily formulation of Namenda is being evaluated in a Phase III Alzheimerâ€™s disease study which is now fully enrolled, and results are expected to be available in early calendar 2008.

â€˘ During the third quarter of fiscal 2005, Forest entered into a collaboration agreement with Gedeon Richter Limited for the North American rights to RGH-188, a compound which is being developed for the treatment of schizophrenia, bipolar mania and other psychiatric conditions. A review of top-line results of a Phase II study in schizophrenia indicated that RGH-188 demonstrated a nominally statistically significant (i.e., not adjusted for multiple comparisons) therapeutic effect compared to placebo in the low-dose arm and a numerical improvement compared to placebo in the high-dose arm that did not reach nominal statistical significance. Based on these results, and subject to a complete review of the full study results, we intend to continue the development of RGH-188 as a treatment of schizophrenia. A second Phase II study of RGH-188 for the treatment of bipolar mania study was commenced in April 2007 and we expect results by the middle of calendar 2008.

â€˘ We anticipate starting a proof of concept study of neramexane in Alzheimerâ€™s disease in the first half of calendar 2008.

â€˘ During the second quarter of fiscal 2005, Forest entered into a collaboration agreement with Glenmark Pharmaceuticals S.A. for the North American development and marketing of GRC3886, a PDE4 inhibitor for the treatment of asthma and COPD. The FDA had requested additional preclinical work which we completed and submitted. FDA has now reviewed this additional data and has given us a response which allows us to move forward with a larger Phase II proof of concept study in COPD, with some limitations.

Other research and development projects we continue to support include: RGH-896, a compound being developed for the treatment of chronic pain and other CNS conditions; a group of novel compounds that target the group 1 metabotropic glutamate receptors (mGLUR1/5); and ME1036, an injectable antibiotic which has demonstrated excellent pre-clinical activity against both Gram-positive and Gram-negative bacteria. In addition, we have entered into several collaborations to conduct pre-clinical drug discovery.

Our effective tax rate was 19% and 21% for the respective three and six-month periods ended September 30, 2007, as compared to 22% for the same periods last year. The decrease was primarily attributable to the Microbia licensing charge in September 2007. Effective tax rates can be affected by ongoing tax audits. See Note 7 to the Condensed Consolidated Financial Statements (Unaudited).

We expect to continue our profitability in the current fiscal year with continued growth in our principal promoted products.

Inflation has not had a material effect on our operations for the periods presented.

Critical Accounting Policies

The following accounting policies are important in understanding our financial condition and results of operations and should be considered an integral part of the financial review. Refer to the notes to the consolidated financial statements for additional policies.

Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting period. Estimates are made when accounting for sales allowances, returns, rebates and other pricing adjustments, depreciation, amortization and certain contingencies. Forest is subject to risks and uncertainties, which may include but are not limited to competition, federal or local legislation and regulations, litigation and overall changes in the healthcare environment that may cause actual results to vary from estimates. We review all significant estimates affecting the financial statements on a recurring basis and record the effect of any adjustments when necessary. Certain of these risks, uncertainties and assumptions are discussed further under the section entitled "Forward Looking Statements".

Revenue Recognition

Revenues are recorded in the period the merchandise is shipped. As is typical in the pharmaceutical industry, gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations. These deductions represent estimates of the related liabilities and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments for actual future settlements have not been material, and have resulted in either a net increase or a net decrease to net income. If estimates are not representative of actual settlement, results could be materially affected. Provisions for estimated sales allowances, returns, rebates and other pricing adjustments are accrued at the time revenues are recognized as a direct reduction of such revenue.

The accruals are estimated based on available information, including third party data, regarding the portion of sales on which rebates and discounts can be earned, adjusted as appropriate for specific known events and the prevailing contractual discount rate. Provisions are reflected either as a direct reduction to accounts receivable or, to the extent that they are due to entities other than customers, as accrued expense. Adjustments to estimates are recorded when customer credits are issued or payments are made to third parties.

The sensitivity of estimates can vary by program and type of customer. However, estimates associated with Medicaid and contract rebates are most at risk for adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can range up to one year. Because of this time lag, in any given quarter, adjustments to actual may incorporate revisions of prior quarters.

Provisions for Medicaid and contract rebates during a period are recorded based upon the actual historical experience ratio of rebates paid and actual prescriptions written. The experience ratio is applied to the period's sales to determine the rebate accrual and related expense. This experience ratio is evaluated regularly to ensure that the historical trends are as current as practicable. As appropriate, we will adjust the ratio to more closely match the current experience or expected future experience. In assessing this ratio, we consider current contract terms, such as the effect of changes in formulary status, discount rate and utilization trends. Periodically, the accrual is adjusted based upon actual payments made for rebates. If the ratio is not indicative of future experience, results could be affected. Rebate accruals for Medicaid were $27,877 at September 30, 2007 and $31,642 at September 30, 2006. Commercial discounts and other rebate accruals were $146,203 at September 30, 2007 and $86,336 at September 30, 2006. These and other rebate accruals are established in the period the related revenue was recognized, resulting in a reduction to sales and the establishment of a liability, which is included in accrued expenses.

Deductions for chargebacks (primarily discounts to group purchasing organizations and federal government agencies) are generally settled within 2-3 weeks of incurring the liability. Based on current contracting trends and chargeback activity, the Company reduced the estimated liability at September 30, 2007 to more closely reflect Managementâ€™s estimate of future chargeback settlements.

Forest's policy relating to the supply of inventory at wholesalers is to maintain stocking levels of up to three weeks and to keep monthly levels consistent from year to year, based on patterns of utilization. We have historically closely monitored wholesale customer stocking levels by purchasing information directly from customers and by obtaining other third party information. Unusual or unexpected variations in buying patterns or utilizations are investigated.

Sales incentives are generally given in connection with a new product launch. These sales incentives are recorded as a reduction of revenues and are based on terms fixed at the time goods are shipped. New product launches may result in expected temporary increases in wholesaler inventories, which as described above, are closely monitored and have not resulted in increased product returns.

Forward Looking Statements

Except for the historical information contained herein, the Management Discussion and other portions of this Form 10-Q contain forward looking statements that involve a number of risks and uncertainties, including the difficulty of predicting FDA approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, the timely development and launch of new products, changes in laws and regulations affecting the healthcare industry, and the risk factors listed from time to time in our filings with the SEC, including the Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, operations may be exposed to fluctuations in currency values and interest rates. These fluctuations can vary the costs of financing, investing and operating transactions. Because we had no debt and only minimal foreign currency transactions, there was no material impact on earnings due to fluctuations in interest and currency exchange rates.